Navigating troubled waters
• Risk and cash flow keep exporters up at night, writes Alf James
Aquick glance at SA’s trade statistics reveals an interesting dynamic — during the first nine months of the year, the country recorded a cumulative trade surplus of R47.1bn, according to statistics from the South African Revenue Services (SARS).
Indeed, SA looks set to record a trade surplus this year, from a virtual neutral position last year and trade deficits in the preceding three years.
Joe Asamoah, executive head, trade SA for Standard Bank, suggests that while a trade surplus would under normal circumstances be interpreted positively, in this case it speaks to depressed economic activity in the country. While currency movements have also had a role to play in reducing the nominal value of imports through the translation of US dollar denominated imports into rands, the export sector appears to have held up well in the context of the appreciation of the rand during the first half of the year.
That said, exporting into foreign markets and, indeed, international trade, is markedly different to local trade in terms of the risk that trading counterparties are exposed to. Justin Milo, head of trade and supply chain finance sales for Standard Bank, says: “Some of the main risk concerns for our clients in the import and export industry are managing foreign exchange rate risk, payment risk, performance risk and transportation risk.”
For importers, the concept of performance risk is top of mind — this risk relates to the possibility a supplier may not supply goods that have been ordered or not according to the correct quality specification.
Milo suggests that one way to mitigate this risk is through the use of a letter of credit which enables the importer and exporter to negotiate the documentation that must be presented between their banks before payment is triggered for the shipment.
A letter of credit can be structured in such a way that there is documentary evidence, which provides confirmation that performance has been met.
“For example, the presentation of an inspection certificate gives the importer the comfort that the correct quantity or quality of goods have been shipped.”
For exporters, the management of payment risk is a key priority and could mean the difference between survival and an untimely death.
“In line with the economic constraints that many of our clients are experiencing within the local economy, they are increasingly looking to explore various export markets. However, when it comes to new export markets, there is the prospect of forming new relationships with their customers — it comes with risk, which is predominantly around payment,” says Milo.
While South African exporters are increasingly looking for new markets, they are risk averse and actively seek payment risk mitigation. Standard Bank is seeing this trend among its clients, who are looking for solutions to mitigate payment risk. The bank would typically recommend that the export is facilitated via a letter of credit, in which the issuing bank (the importer’s bank) irrevocably undertakes to pay the exporter, provided the exporter presents the necessary transport and commercial documentation called for in the letter of credit.
Milo says if the exporter is unfamiliar with the market they are exporting into or the financial institution that issued a letter of credit, they have the ability to get a financial institution to potentially assume the bank and country risk on the trade by “confirming” the letter of credit.
Says Asamoah: “Standard Bank is seeing an increase in these requests from its customers and the bank’s ability to respond to these requests has been positively influenced by the multitude of correspondent banking relationships held by the bank.
“There are also other benefits associated with trading via a letter of credit. Standard Bank can also discount a letter of credit, for example, if the buyer is only going to pay in 30, 60 or 90-day terms, we can discount the letter of credit and advance the cash to our client on day one while we wait for the settlement of that letter of credit, so the letter of credit is a risk mitigation tool that has a number of advantages to it.”
This, according to Asamoah, brings to the fore another key consideration for importers, exporters and any party involved in trade, be it local or cross-border — working capital.
“The biggest requirement is for working capital solutions, which we provide, considering the needs of buyer and seller, by accelerating the cash receivable for the supplier or paying upfront for the buyer.”
Milo says financial institutions have a role to play in assisting exporters and, encouragingly, these institutions are responding to this market need positively through the provision of trade and supply chain finance solutions.